RALPH B. KIRSCHER, Bankruptcy Judge.
After due notice, hearing was held at Great Falls on January 10, 2014, on the
This Court has jurisdiction of this Chapter 13 bankruptcy under 28 U.S.C. § 1334(a). Debtor's motion for turnover and the IRS's motion to lift the stay are core proceedings under 28 U.S.C. § 157(b)(2)(E) and (G).
Counsel for Debtor and the IRS each stated that the parties agree about the material facts, which the Court discerns from the motions and documents on the case docket. Debtor Kirk B. Reisbeck ("Reisbeck") is self employed as an insurance agent for Farmers Insurance, and earns commissions on the sale of insurance.
Reisbeck filed a previous chapter 13 bankruptcy, No. 05-62325-13. In that case his plan was confirmed on September 13, 2005. After several modifications, Reisbeck completed payments under his confirmed plan and received a discharge in Case No. 05-62325-13 on April 12, 2011. That case was closed on June 3, 2011. The chapter 13 trustee's final report and account in No. 05-62325-13 states that the United States Treasury was paid $60,257.91 on its priority claim.
The IRS attempted to negotiate an installment agreement with Reisbeck to pay his outstanding federal tax liability. No agreement was reached, so the IRS levied Reisbeck's commissions from Farmers Insurance. According to the IRS, initially Farmers Insurance did not respond to the IRS's levy, but later Farmers Insurance agreed to send the IRS the funds after the IRS issued a notice and demand letter to Farmers Insurance on or about May 28, 2013.
However, before Farmers Insurance sent the IRS the funds, Reisbeck filed another voluntary Chapter 13 petition commencing the instant case on June 30, 2013. He converted the case to Chapter 11 in November 2013, and since has reconverted back to Chapter 13.
Farmers Insurance made out a check dated July 2, 2013, payable to the United States Treasury in the amount of $25,050.56, and the check was posted to the IRS's account on July 9, 2013. Prior to depositing the check, the IRS did not file a motion to modify the stay, and this Court did not enter an Order modifying the stay authorizing the IRS to deposit the commission check.
On August 7, 2013, Debtor filed a motion for turnover of the $25,050.56 sent by Farmers Insurance to the United States Treasury, and for sanctions.
The IRS filed an objection to Debtor's motion for turnover on August 22, 2013, with its motion to modify the stay nunc pro tunc. The IRS argues that its federal tax lien attached to the Debtor's commissions under federal statutes and regulations, that the IRS was entitled to claim the commissions because of the prepetition levy, and that it should be entitled to retain the $25,050.26 unless the Debtor provides adequate protection of the IRS's interest in the funds, citing United States v. Whiting Pools, Inc., 462 U.S. 198, 209, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). The IRS denies violating the stay because its levy was issued prepetition, and that it is seeking nunc pro tunc relief from the stay to apply the $25,050.26 against Debtor's tax debt.
The IRS filed its original Proof of Claim No. 2 on July 26, 2013, asserting a claim in the amount of $318,005.74 for the years 2007 through 2010, including penalties and interest, and secured by tax liens recorded beginning in 2009 against Debtor's real estate, motor vehicle and other property. The claim includes a secured claim in the amount of $207,601.57, an amount entitled to priority under 11 U.S.C. § 507(a)(8) in the amount of $106,587.68, and an unsecured amount of $3,816.49. The IRS filed an amended Claim 2 on November 4, 2013, asserting a claim in the total amount of $274,919.27. Amended Claim 2 includes a secured claim in the amount of $207,601.57, a priority claim for taxes in the amount of $63,033.08, and an unsecured nonpriority component in the amount of $4,284.62. The attachments to the IRS's amended Claim 2 include the same notices of tax liens recorded in the years 2009, 2010, 2011, and 2012. The Debtor has not filed an objection to the IRS's Claim 2.
The Debtor's filing of his Chapter 13 bankruptcy petition on June 30, 2013, gave rise to an "automatic stay." 11 U.S.C. § 362(a)(3), (4), (5), and (6)
See In re Wardrobe, 559 F.3d 932, 934 (9th Cir.2009), quoting Gruntz.
No dispute exists that the IRS received the $25,050.56 in Debtor's insurance commissions from Farmers Insurance and posted the check to its account, without first seeking and obtaining relief from this Court from the stay. In the Ninth Circuit actions taken in violation of the automatic stay are considered void ab initio. In re Gasprom, Inc., 500 B.R. 598, 604 (9th Cir. BAP 2013); Wardrobe, 559 F.3d at 934; In re Deines, 17 Mont. B.R. 114, 115 (Bankr. D.Mont.1998); Hillis Motors, Inc. v. Hawaii Auto. Dealers' Assoc., 997 F.2d 581, 586 (9th Cir.1993).
The Debtor disputes that the IRS is a secured creditor as a result of its postpetition levy, since the levy violated the automatic stay. Debtor denies that the IRS lacks adequate protection, and denies that the wrongfully levied-upon $25,000 is cash collateral. Debtor contends that the $25,000 is necessary for the Debtor's effective reorganization.
Debtor moves for turnover of the $25,000. "Section 542(a) enables the bankruptcy trustee, or the debtor-in-possession in a reorganization case to seek turnover of the debtors' assets, for the benefit of the estate." In re Hernandez, 483 B.R. 713, 725 (9th Cir. BAP 2012).
The Federal tax lien statute imposes a lien in favor of the United States upon "all property and rights to property, whether real or personal, belonging to" any delinquent taxpayer. 26 U.S.C. § 6321 (2009) (formerly 26 U.S.C.A. 3670 (1956)). A Federal tax lien applies not only to property belonging to a taxpayer as of the date of demand or date when the collector receives the assessment, but also includes property acquired thereafter and owned by the delinquent at any time during the life of the lien. Glass City Bank v. United States, 326 U.S. 265, 268, 66 S.Ct. 108, 90 L.Ed. 56 (1945). The lien "arise[s] at the time the assessment is made" and "continue[s] until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied ..." 26 U.S.C. § 6322 (2009). United States' tax liens are perfected upon assessment; no further action is required. United States v. Vermont, 377 U.S. 351, 355, 84 S.Ct. 1267, 12 L.Ed.2d 370 (1964). Federal tax liens are also effective against
The instant case presents a case of federal statutes in conflict, which in this Circuit has been decided in favor of bankruptcy statutes over tax laws. Actions taken by the IRS enforcing tax laws may be violations of the automatic stay. In re Fuller, 134 B.R. 945, 948 (9th Cir. BAP 1990). The parties in Fuller had similar positions as in the instant case. As summarized by the BAP:
Fuller, 134 B.R. at 947.
The BAP wrote:
Fuller, 134 B.R. at 948.
The BAP commented that, as to dischargeable taxes, the general rule is that a prepetition lien for dischargeable taxes does not attach to postpetition acquisitions. Fuller, 134 B.R. at 947-48; In re Braund, 423 F.2d 718, 719 (9th Cir.1970), cert. denied, U.S. v. McGugin, 400 U.S. 823, 91 S.Ct. 44, 27 L.Ed.2d 51 (1970). In another case, In re Wade Cook Financial Corp., 375 B.R. 580, 591-92 (9th Cir. BAP 2007), and quoting Fuller, the BAP repeated that the IRS is not granted a "special status" in the Bankruptcy Code:
Wade Cook, 375 B.R. at 591-92.
The above-quoted authority shows that Whiting Pools, cited in reliance by the IRS, rejects the argument that the IRS is entitled to special treatment in bankruptcy based upon its tax liens. Fuller, 134 B.R. at 948. The facts are agreed that the IRS received and deposited the $25,050.56 in commissions owed to the Debtor, without first requesting and being granted relief from the stay. The IRS has moved for nunc pro tunc relief from the stay, and § 362(d) vests this Court with discretion to grant appropriate relief, including retroactive annulment of the stay.
Section 362(d)(1) allows for the granting of relief from the automatic stay "for cause, including the lack of adequate protection of an interest in property of such party in interest[.]" Veal, 450 B.R. at 897. This Court explained the standard for modifying the stay for "cause" under § 362(d)(1) in In re Westco Energy, Inc., 18 Mont. B.R. 199, 211-12 (Bankr.D.Mont. 2000):
See also Kronemyer v. Am. Contractors Indem. Co. (In re Kronemyer), 405 B.R. 915, 921 (9th Cir. BAP 2009); Edwards v. Wells Fargo Bank, N.A., 454 B.R. 100, 106 (9th Cir. BAP 2011).
Section 362 vests this Court with broad discretion in granting relief from the stay for cause under § 362(d). Edwards, 454 B.R. at 107; Groshong v. Sapp (In re Mila, Inc.), 423 B.R. 537, 542 (9th Cir. 2010); In re Delaney-Morin, 304 B.R. 365, 369-70 (9th Cir. BAP 2003); In re Leisure Corp., 234 B.R. 916, 920 (9th Cir. BAP 1999); In re Plummer, 20 Mont. B.R. 468, 477-78 (Bankr.D.Mont.2003); Mataya v. Kissinger (In re Kissinger), 72 F.3d 107, 108-109 (9th Cir.1995).
As the party seeking relief, the IRS must first establish that cause exists for relief under § 362(d)(1). United States v. Gould (In re Gould), 401 B.R. 415, 426 (9th Cir. BAP 2009), citing Duvar Apt., Inc. v. FDIC (In re Duvar Apt., Inc.), 205 B.R. 196, 200 (9th Cir. BAP 1996). Once a prima facie case has been established, the burden shifts to the debtor to show that relief from the stay is not warranted. Id. The IRS seeks relief from the stay on the grounds it lacks adequate protection on its secured claim. Debtor moves for turnover of the $25,050.56 to use in his reorganization. "In enacting the Bankruptcy Code, Congress made a determination that an eligible debtor should have the opportunity to avail itself of a number of Code provisions which adversely alter creditors' contractual and nonbankruptcy rights." Platinum Capital, Inc. v. Sylmar Plaza, L.P.
The IRS seeks nunc pro tunc relief from the stay. By annulling the automatic stay, the bankruptcy court may validate an act that would otherwise be void as a violation of the automatic stay. In re Boni, 240 B.R. 381, 385 (9th Cir. BAP 1999). In re Kissinger, 72 F.3d at 108-09 provides:
See In re Deines, 17 Mont. B.R. at 116.
The Ninth Circuit BAP later wrote that the standard is not "extreme circumstances," but instead entails a "balancing of the equities" test on a "case-by-case" basis in which the bankruptcy court has "wide latitude" that will not be upset in the absence of abuse of discretion. In re Fjeldsted, 293 B.R. 12, 15, 23, 24 (9th Cir.BAP2003); Nat'l Envtl. Waste Corp. v. City of Riverside (In re Nat'l Envtl. Waste Corp.), 129 F.3d 1052, 1054-55 (9th Cir. 1997), cert. denied, 524 U.S. 952, 118 S.Ct. 2368, 141 L.Ed.2d 736 (1998).
While several factors may be considered, the general trend is for a court to focus on two factors in determining whether cause exists to annul the stay: "(1) whether the creditor was aware of the bankruptcy petition; and (2) whether the debtor has engaged in unreasonable or inequitable conduct, or prejudice would result to the creditor." Fjeldsted, 293 B.R. at 24, quoting Nat'l Evntl. Waste Corp., 129 F.3d at 1055. As to the first factor, the IRS's motion states that the $25,050.56 check from Farmers Insurance was dated July 2, 2013, after the petition date, and that the revenue officer released the IRS levy on July 3, 2013, because Reisbeck filed his bankruptcy petition on June 30, 2013. The BNC certificate of mailing the notice of commencement of the case states that the IRS received electronic transmission service on July 2, 2013. Thus, the record shows that despite notice of the bankruptcy filing, the IRS proceeded to post the $25,050.56 check to its account on July 9, 2013. As to the first factor, the creditor IRS was aware of the bankruptcy petition.
The second factor considers whether the debtor has engaged in unreasonable or inequitable conduct, or prejudice would result to the creditor. The IRS argues that the Debtor failed to pay his taxes while at the same time losing large amounts of money gambling at casinos and the Montana lottery. Those gambling activities, however, are legal and revenue-producing activities in the State of Montana, and as such the Court does not consider
As to whether prejudice would result to the creditor, the Court returns to the IRS's powerful rights based on the tax lien statutes, outside of bankruptcy. Its tax liens are asserted on the Debtor's real estate, motor vehicle and other property. The Debtor has not objected to the IRS's amended Claim 2 so it is deemed allowed, and Debtor has not initiated an adversary proceeding challenging the validity of the IRS's tax liens. The IRS's priority claim of $106,587.68 must be paid in a plan proposed under either chapter 13 or chapter 11. 11 U.S.C. § 1322(a)(2); 11 U.S.C. § 1129(a)(9)(C) & (D). The IRS's priority tax claims are not dischargeable. 11 U.S.C. § 523(a)(1)(A).
In considering whether prejudice would result to the creditor IRS if nunc pro tunc relief is not granted, this Court concludes that the IRS is more likely to receive payment on its claims if the Debtor has the $25,050.56 to reorganize his debts in a repayment plan. Debtor's previous completed chapter 13 plan in Case No. 05-62325-13 resulted, according to the trustee's final report, in payment to the United States Treasury of $60,257.91 on its priority claim. The Court deems it appropriate to give the Debtor the opportunity to reorganize and propose another repayment plan to give him the chance to pay the IRS his tax debt.
The BAP cited Fjeldsted in In re Gasprom, Inc., 500 B.R. 598, 607 (9th Cir. BAP 2013) and repeated the list of factors which can be used as a general guideline for assessing the equities:
Gasprom, 500 B.R. at 607.
Although counsel stated the relevant facts are agreed, the Court has little evidence before it relevant to several of the above-listed factors. This appears to be Reisbeck's second bankruptcy filing. The Court sees no evidence of circumstances which indicate an intention to hinder and delay creditors any more than in any reorganization or adjustment case. No evidence exists of record of prejudice to creditors other than the IRS, or to third parties if the stay relief is not made retroactive. The IRS is protected by its tax liens and priority claim status, and its
According to the IRS's motion it knew of the stay on July 2, 2013, when it received electronic notice, but it posted the check from Farmers Insurance to its account on July 9, 2013. The Debtor waited almost a month to file his motion for turnover of the $25,050.56, although it appears the parties were in negotiations. The IRS did not move for relief from the stay nunc pro tunc until August 22, 2013. Thus, after learning of the bankruptcy the IRS proceeded to take the step of depositing the check in continued violation of the stay, and the IRS did not move immediately for nunc pro tunc relief. Restoring parties to the status quo ante is relatively easy since the funds remain in the IRS's possession.
As to the costs of nunc pro tunc relief to the Debtor and other creditors, nunc pro tunc relief from the stay likely will cause irreparable injury to the Debtor, according to his contention that he needs the $25,050.56 to reorganize. The IRS offered no evidence to the contrary. No evidence exists tending to show whether stay relief will promote judicial economy or other efficiencies. In all likelihood granting nunc pro tunc relief would seriously impair Debtor's ability to reorganize.
Having considered the factors from Gasprom and Fjeldsted and having balanced the equities, this Court concludes that nunc pro tunc relief from the stay as requested by the IRS is not an appropriate exercise of the Court's discretion, and that Debtor's motion for turnover of the $25,050.56 should be granted and the IRS's motion for nunc pro tunc relief from the stay should be denied so that the Debtor may proceed to propose a repayment plan. The IRS is adequately protected by its tax liens and priority and nondischargeable status of much of its claim, which apparently continues to accrue interest and penalties.
